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Rebalancing the Global Economy

In Burmese, pauk phaw means “fraternal” or “kinsfolk.” Historically, this is how China and Myanmar have referred to their relationship. However, they remain an unequal pair, with China’s overall GDP nearly 160 times that of Myanmar’s, a per capita GDP roughly five times as large, and a population nearly 26 times greater than that of its neighbor. On top of these imbalances, the recent political and economic reforms following Myanmar’s general elections in 2010 have further challenged bilateral relations, forcing the countries to re-evaluate the status quo of their relationship.

Since the beginning of the 21st century, the pauk-phaw relationship has centered on China’s economic development and, correspondingly, the country’s overwhelming need for energy and commodities. The State Grid estimates that the country’s total power consumption will double by 2020, from 4.69 trillion kWh in 2011, making hydroelectricity and coal core concerns.

China’s quest for energy security is a strategic opportunity for Myanmar. According to official data, Myanmar has total estimated gas reserves of 2.54 trillion cubic meters (the 10th largest in the world), 3.2 billion barrels of oil reserves (the largest in Southeast Asia), and an ample number of rivers. China, seeking to establish a diversified portfolio of energy suppliers, heavily weights its investments in Myanmar toward oil and gas, mining, and hydroelectric operations.

As Myanmar implements political and economic reforms, it will need to rely on foreign capital to bring its infrastructure and industry up to speed. The McKinsey Global Institute estimates the gap between required investment and domestic savings to be as much as US$170 million. Foreign investment would serve not only as a source of financing, but also as an important source of capacity building, knowledge-sharing, and connectivity to global supply chains.

From 1988 to July 2013, total contracted foreign investment in Myanmar hit US$42.95 billion, according to a report by PwC. Greater China accounts for more than 48% of this total, making it the largest single investor in Myanmar during this period.

As Myanmar implements political and economic reforms, it will need to rely on foreign capital to bring its infrastructure and industry up to speed.

Given these figures, how will the changing dynamics of Myanmar’s political and economic environments affect China’s investment strategy there? And going forward, how will Myanmar manage — and indeed leverage — its powerful and resource-hungry neighbor to the north? To what extent will both sides of the relational equation experience significant rebalancing?

New Norms or Once-off Success?

In 2013, China achieved a potentially precedent-setting victory in the oil and gas sector in the form of two major Sino-Burma overland pipelines. The Shwe gas pipeline, which links gas reserves off Myanmar’s Arakan coast with Yunnan province in southern China (via Myanmar’s deep-water port of Kyaukphyu and the border crossing at Ruili), went live in late July; there is also a corresponding oil pipeline. The two projects, begun in 2009 with an operational agreement between China’s state-owned China National Petroleum Corporation (CNPC) and the previous government’s junta-linked Myanmar Oil and Gas Enterprise (MOGE), come with a combined price tag of RMB17.7 billion (US$2.9 billion). CNPC is set to hold a 50.9% stake and will manage the project; MOGE will own the remainder. In addition, China is entitled to take over 90% of the resources extracted (22 million tons of oil annually versus Myanmar’s two million)

The flip side of this argument, however, is that such a project may, in fact, accomplish exactly the opposite. According to Paul Stevens, a senior research fellow in the Energy, Environment and Development Programme at Chatham House in London, cross-border pipelines such as these have the significant potential to engender conflict and local resentment (parties on both sides may have conflicting agendas and motivations, and benefits may not be shared equally).

Regardless of the motivations, China stands to benefit enormously. The Shwe pipelines will supply China annually with roughly 10 billion cubic meters of gas and an expected 22 million tons of crude oil, or approximately 10% of the country’s total oil imports in 2010. Should implementation and operations continue smoothly, this project may indeed be a bellwether for the complexity and scale of the Chinese government’s future ambitions in Myanmar.

Myanmar’s Hydropower Potential

China is also keen to tap into Myanmar’s hydropower potential to alleviate its problem of acute water scarcity. China is home to 21% of the world’s population, but only 6% of its fresh water. While it has designated RMB4 trillion (US$653 billion) to water-related conservation and infrastructure projects over the next 10 years, the country will also need to seek out more water sources as it continues to urbanize and grow its economy. In contrast, Myanmar is estimated to have 24,164 cubic meters of water per capita per year, which is more than 10 times the per capita endowment of China and India, something the Chinese hope to take full advantage of.

Of the cumulative RMB86.5 billion (US$14.2 billion) that China has invested in Myanmar since 1988, more than 50% has been allocated for hydropower dam projects. Myanmar’s hydropower is especially attractive to the landlocked Chinese province of Yunnan. According to the Harvard Ash Center for Democratic Governance and Innovation’s David Dapice, a leading expert on economic development in Southeast Asia, it is a “cheap, green and accessible resource.” However, in contrast to the Sino-Burma pipelines, hydropower projects have presented Chinese commercial investors with much steeper challenges.

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The Chinese are financing roughly 30 dam projects across Myanmar, the most high-profile of which is the Myitsone Dam in northern Kachin state. The primary financier is China Power Investment Corporation (CPI), in partnership with Asia World Company, a privately owned Sino-Burmese company. Under the original terms of the contract, China was to receive 90% of the 3,600 to 6,000 megawatts of electricity generated, with most of it allocated to Yunnan province. At the other end of the deal, Myanmar was to receive 10% of the generated electricity, various tax proceeds, and RMB103 billion (US$17 billion) for the 50-year lease. Initially scheduled to go online in 2017, the Myitsone Dam would flood 300 square miles of land along the Irrawaddy River.

One might argue that China’s forceful pursuit of imbalanced hydropower and other resource-extraction projects is a prime example of its exploitative global strategy.

While construction on the Shwe pipelines has continued unhampered, President Thein Sein suspended construction on the Myitsone Dam on September 30, 2011. He cited environmental concerns — as the Myitsone is situated close to an earthquake zone — as well as ethnic concerns: The project would have displaced more than 10,000 Kachins. Dapice also noted that the Burmese regard the dam location, at the head of the Irrawaddy, as a site of great environmental, cultural, historical, and even spiritual significance — in much the same way as Americans regard the Grand Canyon.

But, most importantly, much of the Burmese population objected to the construction of the dam because it symbolized the often unfair, corrupt, and exploitative nature of the pauk-phaw relationship. With many villages in Myanmar yet to be connected to the central grid, popular discontent with the project posed a serious risk for the newly formed government. According to Christian Lewis, Southeast Asia analyst at Eurasia Group, a global political-risk consulting firm, “the tide of populism is powerful” and civil society will continue to have a stronger voice in reshaping those contracts signed under the former junta government. Thus, Thein Sein aptly leveraged anti-Chinese sentiments to suspend the project, gaining popular favor in the process. Caught off guard, China initially called for an immediate restart and legal action.

Myanmar’s Strategy: Make New Friends But Keep the Old?

By suspending work on the Myitsone Dam and other projects such as the Letpadaung Copper Mine, the Burmese government is sidelining China, its most important diplomatic and economic ally. Data from China’s Ministry of Commerce show that investments in Myanmar dropped from RMB51.8 billion (US$8.5 billion) in 2011 to RMB6.2 billion (US$1.02 billion) in the first 11 months of 2012. Myanmar is essentially banking on newly reinstated relations with the West, primarily the U.S., to drive future investment and economic growth. While the Burmese see the government’s action as following the will of the people, investors and analysts also believe that the move signals a fundamental shift in the relationship.

What will this mean for Myanmar’s strategy? The civilian government recognizes that civil society — including ethnic minorities such as the Kachin, rural communities, NGOs, and the political opposition — will play a greater role in determining the foreign-investment process in the country. Unlike the junta government, President Thein Sein will need to continue political reforms and to balance the desires of the populace with the needs of entrenched power.

While some experts believe the Myitsone Dam project may eventually be cancelled, it is more likely that Myanmar will leverage its hydropower potential to force China to renegotiate more favorable terms for existing projects. CPI has already invested billions of dollars into Myitsone, and it is keen to see a return on its investments by agreeing to a new contract. However, despite alternative proposals on how to best manage the dams built in Kachin state, negotiations and construction on the dam remain at an impasse.

Will Myanmar continue to force China’s hand? Yun Sun, a fellow with the East Asia program at the Stimson Center, a nonpartisan global-security think tank, notes that Burmese officials “understand the risk of suspension or termination of such projects.” Suspension of the Myitsone Dam has already sent a strong message to commercial and government interests in China — further measures will serve only to belabor the point and lead to an irreparable rift in relations.

From an investment point of view, prospects are bright for this resource-rich nation with a young population situated at the very crossroads of Asia.

In the end, Myanmar will seek to diversify its trading and investment partners. Myanmar policymakers recognize that greenfield investments into energy and commodities will flush the economy with cash but will not be a magic bullet for economic development. For example, investments from the U.S. have centered instead on light manufacturing and the production of consumer goods. That said, infrastructure in Myanmar is still lacking, and China remains one of the few international investors willing and able to extend large sums of cheap long-term loans for critical infrastructure development to such politically risky countries as Myanmar. Moreover, in order to attract diverse investments from the international community, Myanmar will have to continue economic, if not political, reforms. Thus, the ability and extent to which the Burmese government is able to attract and facilitate foreign investments remains to be seen.

China’s Strategy: A Balancing Act

There is debate among the international community as to whether China’s aggressive “going-out” strategy for foreign investment has generated odious debt/obligations for its partner nations. The Center for Global Development defines this as a situation in which “an illegitimate, unelected regime signs a contract with a foreign agent, handing over part of the national patrimony in exchange for a short-run payment, which the regime … uses in part to finance repression. In the case of natural resource contracts, citizens continue to suffer from sweetheart contracts that deprive the government of deserved revenues.”

One might argue that China’s forceful pursuit of imbalanced hydropower and other resource-extraction projects is a prime example of its exploitative global strategy for claiming resources, making friends, and exerting international influence. Does this type of behavior “bolster rogue states, fuel corruption, and increase the debt burdens of poor countries,” as Ngaire Woods, dean of the Blavatnik School of Government at Oxford University, has argued?

Recognizing the possible reputational pitfall, China has taken steps to clarify its position on investment in Myanmar. For example, in an interview in August 2013 with The Irrawaddy, an independent publication covering Southeast Asia,Yang Houlan, the Chinese ambassador to Myanmar, reiterated his country’s commitment to the people of Myanmar. He emphasized a bilateral mood of cooperation and positive momentum, and highlighted China’s work with civil society organizations, opposition political and ethnic groups, border peace efforts, and prodemocracy forces within Myanmar.

Despite this outwardly cordial relationship, however, China significantly slashed its investment in Myanmar in 2013 in light of rising anti-Chinese sentiment in the country and the failures of key projects such as the Myitsone Dam and the Letpadaung Copper Mine. It issued harsh criticism of the escalating conflicts in Kachin state and expressed concern over border-security issues. Moreover, Chinese leaders did not visit Burma during the 18 months of frenetic reform between April 2011 and September 2012, in stark contrast to the three visits Chinese diplomats paid from March 2009 to June 2010 (pre-democratization).

One reason may be an ideological misalignment in terms of the relative importance of economic development versus political reform. China has placed industrialization, modernization, and consumerism at the forefront of its development agenda for the past 30 years, at times sacrificing human rights, environmental sustainability, and government and media transparency, among other things. Economic growth has been seen as a panacea for all the ills and upheavals of the previous century. Myanmar, on the other hand, welcomes economic growth, but there is also a strong desire to balance growth with democracy and human rights. Perhaps this more-nuanced approach stems from the country’s deep-seated and relatively conservative Buddhist cultural foundations. Its implications are that Myanmar may not be willing to accept development assistance or foreign investment from China at any cost: If growth for growth’s sake is not the sole goal, the Burmese can afford to be a bit pickier about where their foreign investments come from.

Nonetheless, China remains hopeful about its prospects in Myanmar. After all, it remains the country’s largest and most powerful neighbor. China has good economic reasons (energy security, commodities trade, and a potential new consumer market) to forge strong ties with Myanmar, and this is likely fueling much of the positive dialogue. Moreover, Myanmar is hardly the riskiest place in which China operates: The latter is, at this point, accustomed to doing business across Africa and Central Asia, some of the most volatile, risky, and underdeveloped parts of the globe. Investing in nearby Myanmar may not seem like the dangerous black box some Westerners perceive it to be.

However, Myanmar’s increasingly close relations with Japan, India, the U.S., and its Southeast Asian neighbors are a possible source of concern for China. Should it wish to protect its influence in the country, China has a distinct incentive to invest responsibly and to work to appeal to a broad section of the Burmese population. China’s strategy in Myanmar will likely remain aggressive yet tightly managed.

Everything to Play for

Myanmar remains one of the last frontier economies in the world. From an investment point of view, prospects are bright for this resource-rich nation with a young population situated at the very crossroads of Asia. The McKinsey Global Institute estimates that it has the potential to quadruple its current GDP to over US$200 billion by 2030, create more than 10 million new jobs, triple its annual spending to US$100 million, and add 19 million people to Asia’s consumer class. However, at this pivotal moment, this severely underdeveloped and misgoverned nation faces serious uncertainty over its true ability to transform and to leapfrog into today’s technologically advanced and fast-paced markets.

A neighbor with long-standing ties to Myanmar, China has the unique opportunity to play a crucial role in this metamorphosis. China has poured billions of dollars into Myanmar to tap into the country’s plentiful natural resources and simultaneously to develop some infrastructure capability. However, given China’s track record in Africa, Latin America, and parts of Central Asia, whether it will be capable of playing a purely constructive role remains to be seen. With so many eyes on Southeast Asia’s newest darling economy, China will certainly begin to feel pressure to invest responsibly and to foster long-term sustainability from environmental, social, and economical perspectives.

This article was written by Chryssa Rask and Chanda Wong, members of the Lauder Class of 2015.

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